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    Residual dividend policy debated

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    Positive NPV projects enhance shareholders' wealth. However, in some cases the payment of dividends limit the number of positive NPV projects a firm can accept. Why, then shouldn't shareholders prefer a residual dividend policy?

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    Solution Preview

    Since profits vary over time, dividends should also vary. Many stockholders, however, rely on dividends to meet expenses.

    Under the residual dividend model, dividends are determined as follows:
    1. The firm determines its optimal capital budget;
    2. ...

    Solution Summary

    Residual dividend policy and shareholders are correlated in the solution.